Mechanics reach deal with United

Final agreement fuels optimism

April 12, 2003|By Susan Chandler, Tribune staff reporter.

Now it's a full house.

The mechanics union at United Airlines agreed Friday to a six-year contract that will save the airline more than $349 million a year, making it the final employee group to fall in line with the company's plan to slash $2.56 billion in annual costs.

Chief Executive Glenn Tilton called the belt-tightening agreements with six unions reached since late March "an extraordinary accomplishment for United."

But United, which sought bankruptcy protection last December, still has some rough air ahead, industry experts say.

Five of the six union deals require ratification by members. United's pilots overwhelmingly approved their new contract on Friday.

And the combination of war in Iraq and the falloff in Asian travel due to severe acute respiratory syndrome, or SARS, has cut into United's revenue, making it harder for the company to meet stiff monthly cash-flow targets set by its debtor-in-possession lenders.

Still, the optimism at United's Elk Grove Township headquarters was tangible Friday. After months of bad news, officials at the nation's second-largest air carrier sense traction on the turnaround plan.

By reaching voluntary agreements with its employees, United has avoided an ugly court battle that might have scared away investors it will need next year to exit Chapter 11.

Fuel prices are dropping dramatically, which benefits United more than other carriers because its fuel contracts were unhedged, leaving it vulnerable to price spikes.

And the odds are increasing that some additional government aid will be coming United's way as part of an airline industry assistance package being hammered out in Congress.

Even so, Tilton's management team has little time to congratulate itself. It now must turn its attention to convincing potential investors that United has a viable business strategy to accomplish two seemingly incompatible goals.

United must find a way to retain its elite business travelers, who pay premiums for their tickets and expect top-flight service, while figuring out how to win back leisure travelers who have decamped to discount carriers, industry experts say.

United's management thinks it has the answer to the second part of that challenge. Tilton has proposed creating a low-cost carrier inside United's mainline operation. The new contracts with employees allow him to go forward with that plan, which has been internally code-named "Starfish."

But some aviation experts doubt that Starfish is the answer to the company's strategic dilemma. And although Tilton has gained credibility on the labor front, the former oil industry executive still hasn't convinced everyone that he knows how to run an airline.

"United has to get some solid direction. Right now, it looks like outside advisers are pulling United's senior management by the nose," says Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo.

"When you hear that the airline is going to use `transformational models to reconstitute our margins and pressure-test all our routes,' that's doublespeak. I don't know what it means, and I've been in the business 30 years."

As one of Tilton's first moves after United sought bankruptcy protection Dec. 9, he hired consulting firm McKinsey & Co. to help craft a vision for the airline.

By reaching a deal with United's mechanics, Tilton has proved he is not a guy to be taken lightly.

Many of United's mechanics have been angry with the company and their union leaders since 1994, when the union agreed to use wage cuts to become employee-owners of United. Such feelings only intensified when United sought bankruptcy protection, making the stock they had purchased nearly worthless.

The mechanics were the only employee group at United that voted down pay cuts late last year designed to keep United out of Chapter 11.

But United's recent closing of its state-of-the-art maintenance base in Indianapolis was a jolt of reality for many mechanics, union sources said. United placed all 1,100 of the facility's workers on furlough because of traffic declines resulting from the Iraq war. The airline has promised to reopen the facility in June.

Some industry experts expected that United wouldn't be able to reach a deal with the mechanics and would have to let U.S. Bankruptcy Court Judge Eugene Wedoff sort things out.

The tentative deal, which requires ratification by United's 12,000 mechanics, calls for a 13 percent wage reduction, a 20 percent contribution to employee health-care costs and changes in work rules. Existing pension benefits, vacation days and holidays would be unchanged.

Further details were unavailable Friday, but the deal almost certainly involves significant outsourcing of union jobs. In March, United filed documents showing it was seeking to outsource its heavy maintenance work and cabin-cleaning jobs.

Because of the tentative agreement, a Monday hearing to begin the process of throwing out United's labor contracts has been canceled. United plans to withdraw a motion asking the judge to reject the contracts, a company spokesman said.

Not everyone is persuaded that United's turn of fortune will be enough to save the carrier.

Gordon Bethune, CEO of Continental Airlines, told an aviation conference in Phoenix this week that United is "HIV-positive" and predicted it will fail to emerge from bankruptcy.

After AIDS groups around the country decried his comment, Bethune said he was sorry for his "poor choice of words" but stuck with his prediction.